It seems so simple watching others do it on television. A photogenic, home-buying couple purchases a dilapidated old property, creates a plan to restructure it, hires a team to knock out some walls, add some paint, replace the finishings, and voila! By the end of the program, the happy couple has a brand new home with a line of prospective buyers out the door, all eager to pay top dollar and make their flipping dreams come true.
The reality of home flipping can be far more complicated and perilous to a flipper’s bottom line. Without the proper planning, backing, and skill, a potentially advantageous resell could instead become a nightmare of snarled logistics and racked-up charges.
Here are five mistakes to avoid when flipping houses in the Jacksonville area.
Buying the Wrong Property
It is tempting for a reseller to find the lowest-priced properties and buy as cheaply as possible, under the assumption that spending less on the property itself will free up more capital for improvements and maximize the likelihood of turning a large profit.
Unfortunately, this is a common misnomer among novice flippers. While spending a low amount on a flip property does technically leave more available money for renovation, many other factors may come into play that can erase this advantage.
A home may be priced low due to serious structural issues or extensive needed repairs that will be very expensive to remediate. The location of the home itself may be undesirable.
Even the property layout may be out of fashion with the latest market trends and unpopular with potential buyers, which could require even more capital to be utilized to bring the home in line with preferred designs.
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Working with a Substandard Contractor
Finding the right contractor is a crucial step towards making your flipping dreams a reality. After all, the driving force behind house flipping is to realize a profit once renovations are complete and the home is sold.
However, a careless contractor who cuts corners, uses inferior products, overcharges for supplies, and/or employs unskilled labor who perform shoddy work will hamstring a flip project before it ever has the chance to enter the market.
It’s always a good rule of thumb to carefully check contractor reviews and local feedback so that you can select one who is reliable, skilled, and will address your renovation needs while staying within budget.
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Underestimating Renovation Costs & Ignoring the ARV 70% Rule
The most important consideration in deciding on whether a property is worth flipping is determining the extent of the renovation costs and calculating whether your budget will allow you to afford to improve the home and still make a worthwhile profit.
Renovators and expert flippers make this decision via the 70% ARV Rule. This rule is widely used among the fix-and-flip community and states that the amount paid for a property – plus the expected renovation costs – should not exceed 70% of the ‘After Repaired Value’ (ARV) of the property.
In other words, if the value of an after-repaired property is $1 million and it is being sold for $400,000 as-is, a flipper should not pay more than $300,000 on repairs and improvements. Violating the 70% ARV Rule means too much capital is being sunk into the flip property and an insufficient profit is being made.
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Making Mismatched or Unwelcome Improvements
It may sound like an oxymoron, but too many improvements on a home may actually hurt a flipper in the long run. Not just because unnecessary cash is being wasted, but also because the wrong kind of improvements are being made.
Not every neighborhood is alike and the enhancements that might be appropriate for homes in historic areas such as Avondale or Riverside may not mesh well with homes in different sections of Jacksonville.
Sinking disproportionate amounts of cash into a starter home may cause the property to stick out like a sore thumb in its neighborhood and scare away potential buyers.
Likewise, attempting to save money by installing starter grade finishings in a high-end property is a recipe for disaster.
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Not Choosing the Lender That’s Right for You
Many lenders primarily handle standard residential loans and are not well-equipped to handle the needs of a fix-and-flipper.
Conventional renovation loans are often not adequately structured for investments and can take far longer to close, with a more arduous, paperwork-heavy, and time-consuming process. Lenders that offer hard money loans are uniquely positioned to help house flippers get started quickly and efficiently.
Park Place Finance specializes in helping Jacksonville flippers with all of their hard money loan needs and can close quickly. To get the ball rolling on your flipping dreams, contact Park Place Financial, a trusted lender with a proven track record of hard money success.